In re Polo Builders, Inc.

• Decision Date: 24 January 2008
• Docket Number: Bankruptcy No. 04 B 23758.,Adversary No. 04 A 04032.
• Citation: 388 B.R. 338
• Parties: In re POLO BUILDERS, INC., et al., Debtors. David R. Brown, Trustee, Plaintiff, v. Real Estate Resource Management, LLC, Bharat Kothari, and Vasile Sava, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

388 B.R. 338

In re POLO BUILDERS, INC., et al., Debtors David R. Brown, Trustee, Plaintiff, v. Real Estate Resource Management, LLC, Bharat Kothari, and Vasile Sava, Defendants.

Bankruptcy No. 04 B 23758.

Adversary No. 04 A 04032.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

January 24, 2008.

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Bell, Boyd & Lloyd (Harley J. Goldstein), Freeborn & Peters (Jeffrey J. Mayer), for Movant and Plaintiff.

Zane, Smith & Associates, Ltd. (Zane D. Smith), for Respondent and Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

In June, 2004, Polo Builders, Inc. and its affiliated debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. On August 16, 2004, those cases were converted to proceedings under Chapter 7 of the Bankruptcy Code, and the Plaintiff-Trustee ("Trustee" or "Plaintiff") was appointed by the United States Trustee to administer the Debtors' bankruptcy estates. The Trustee subsequently filed this Adversary Complaint against Real Estate Resource Management, LLC ("RERM") and its "Members" (as defined in the Operating Agreement of Real Estate Resource Management, LLC (see generally Joint Exhibit ("JX") 21)), Bharat Kothari ("Kothari") and Vasile Sava ("Sava") (collectively "Defendants"). The individual defendants, Kothari and Sava were each half owners of RERM with Sava acting as the sole "Manager" (also defined in the Operating Agreement).

The Trustee's First Amended Complaint alleges four counts for relief: Count I for breach of a contract for purchase and sale of 4180 North Marine Drive, Chicago, Illinois, (commonly known as "Polo Tower") for a price of sixteen-million-six-hundred-thousand dollars ("$16,600,000") to be paid by RERM; Count II for alter ego liability on the contract, asserted against Kothari; Count III for alter ego liability on the contract, asserted against Sava; and Count IV for fraud by RERM and Kothari for alleged misrepresentations and omissions concerning RERM's ability to perform under the contract.

After considering the evidence, including stipulated evidence, and arguments presented by the parties, the following Findings of Fact and Conclusions of Law are made and will be entered pursuant thereto. Judgments will separately enter for Plaintiff on Count I and for Defendants on the remaining Counts.

FINDINGS OF FACT

The parties stipulated to a timeline and outline of facts, which are found as presented by the parties, marked as Stipulated Facts ("Stip.Fact"), and integrated here. The evidence presented at trial provided the further detail needed to decide the case.

Plaintiff argues that Defendants have stipulated themselves into defeat as to certain issues. As found and held below, that argument is rejected. The evidence presented at trial provided context and full history as to the Stipulated Facts. See Findings of Fact, supra ¶ 35 n. 2.

The Parties

1. On June 23, 2004 ("Initial Petition Date"), Hasan Merchant ("Merchant"), Polo Builders, Inc., M & MM Enterprises, LLC, and Sheri Banoo Merchant ("Initial Debtors") filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code ("Bankruptcy Code"). (See Stip. Fact 7.)

2. On June 29, 2004, MG International, LLC (collectively with the Initial Debtors, the "Debtors") filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code. (See Stip. Fact 8.)

3. Plaintiff, the Trustee, was appointed by the Office of the United States Trustee on August 16, 2004 to administer the bankruptcy estates of the above captioned, jointly-administered debtors. (See Stip. Fact 1.)

4. The Trustee, on behalf of the Debtors' bankruptcy estates, held an interest in the property commonly known as Polo Tower located at 4180 North Marine Drive, Chicago, Illinois, and was attempting to sell the property pursuant to the Order Granting Motion of Chapter 7 Trustee for Entry of an Order: (A) Approving the Sale of Property Free and Clear of Liens, Claims and Encumbrances; (B) Surcharging Collateral; (C) Approving Bid Procedures and Bidding Protection for Sale of Right to Designated as Agent; (D) Shortening Notice; and (E) Granting Related Relief ("Designation Rights Order" or "DRO") entered by this Court on September 16, 2004. (See Stip. Fact 10.)

5. Drs. Narendra and Geeta Gupta ("Guptas") invested in Polo Tower through entities controlled by Merchant and the affiliated debtors. The Guptas invested approximately $12 million through the affiliated debtors, as well as personally guaranteeing another $15-17 million in loans from other lenders. (Michael Goode ("Goode") Trial Test.)

6. At some point, the Guptas had second thoughts about their investment in Polo Tower and demanded that Merchant return their investment. (Id.) Merchant was unable to return the Guptas' money and, therefore, filed the underlying bankruptcy proceedings on behalf of himself and the affiliated debtors. (Id.)

7. The Guptas were concerned that any disposition of Polo Tower at a judicial sale might result in a substantial deficiency judgment against them as personal guarantors of the loans. (Id.)

8. Defendant Kothari is, and at all relevant times was, a resident of the State of Illinois. (See Stip. Fact 3.)

9. Kothari is a personal friend of the Guptas. (Kothari Trial Test.)

10. On July 13, 2004, Sava formed an Illinois limited liability company ("LLC") called Vasile Sava Real Estate Group, LLC. (See JX 20 at RERM0001-04.)

11. Defendant Sava is, and at all relevant times was, a resident of the State of Illinois. (See Stip. Fact 4.)

12. On July 19, 2004, Kothari and Sava executed the Operating Agreement of Real Estate Resource Management, LLC ("Operating Agreement"), (see JX 21 at RERM0007-34), and filed an amended Articles of Organization changing the name of Vasile Sava Real Estate Group, LLC to Real Estate Resource Management, LLC. (See JX 20 at RERM0005-06.)

13. Defendant RERM is a limited liability company organized under the laws of the State of Illinois. (See Stip. Fact 2.)

14. According to the Operating Agreement, Article 2.2:

Purposes. The purposes of the Company are to own, maintain, manage, operate, sell, lease, develop, finance, dispose of, and otherwise invest in and deal with real estate including as a licensed real estate broker pursuant to the laws of the State of Illinois, and invest in entities which own or operate real estate; and to engage in any and all other activities related or incidental thereto.

(JX 21 at RERM0013 ¶ 2.2.) Thus, the scope of the limited liabilities company's business broadly covered activities in the real estate industry, although RERM was formed specifically to market and sell condominium units in connection with a real estate development at 1000 South Michigan Avenue, Chicago, Illinois. (Kothari Trial Test.)

15. Kothari and Sava each held a fifty percent interest in RERM, (See JX 21, Ex. A at RERM0033), and shared annual net income and losses accordingly. (Id. at RERM0015 ¶ 4.1.) However, according to the Operating Agreement, Article 6.3, "Appointment of Initial Manager. The Members hereby elect and appoint Vasile Sava as the sole Manager." (Id. at RERM0022 ¶ 6.3.) As a Member, Kothari did not have any right to "participate in the management and control of the conduct of the Company business and shall have no authority to act on behalf of or in the name of the Company, or at any time by any act or thing to bind the Company, unless otherwise provided herein." (Id. at RERM0018 ¶ 5.2.)

The RERM Purchase and Sale Agreement

16. At some point during the spring and summer of 2004, Kothari and/or Sava developed an interest in Polo Tower. (Kothari Trial Test.; Sava Trial Test.) Their interest was twofold: (1) if they could facilitate a private sale of Polo Tower, they could reduce or eliminate the potential liability of Kothari's friends, the Guptas, on their loan guarantees; and (2) they hoped to generate business for RERM by "flipping" the property to another buyer at a profit and/or charging fees as a co-developer of the property. (Kothari Trial Test.)

17. In fact, in the spring of 2004, Sava showed Polo Tower to a potential buyer, who made an offer for purchase and sale of the property for approximately $18 million. (Sava Trial Test.) That contract was canceled due to concerns that arose about the condition of the property during the due diligence period. (Id.)

18. On August 16, 2004, this Court entered an order converting these cases to proceedings under Chapter 7 of the Bankruptcy Code. The Trustee was appointed by the United States Trustee to administer the Debtors' bankruptcy estates. (See Stip. Fact 9.)

19. In September, 2004, Kothari showed the property to John Murdoch ("Murdoch"), an Australian banker and financier, who was visiting Chicago and expressed an interest in investing in real estate in the city. (Kothari Trial Test.) It was Kothari's pursuit of Polo Tower on behalf of Murdoch that led to the signing of the Purchase and Sale Agreement and breach of contract which are the basis of this cause of action.

20. On September 16, 2004, Bankruptcy Judge Goldgar, to whom the bankruptcy case was assigned, entered the Designation Rights Order. (See JX 5 at PT000741-61.)

21. The DRO established bid procedures for assigning the Designation Rights.¹ (Id. at PT00747-48 ¶ 4.) DJM Asset Management, LLC ("DJM") agreed to act as the "stalking horse" bidder, submitting an initial bid of $175,000. (Id. at PT000743-44 ¶ H.) Nobody else submitted any bids, and DJM became the "Agent" pursuant to the DRO. (See JX 98, Goldstein Dep. Test. 7:7-14.)

22. DJM Asset Management, LLC, the company which employed Ronald Douglass ("Douglass"), paid $175,000 for the exclusive right to "rehabilitate, develop,...